Health reform: The $$$ story

NEW YORK (CNNMoney.com) -- The political whirlwind that has surrounded the historic health reform passage was powered by many issues. Cost was chief among them.

The Congressional Budget Office (CBO) has weighed in with what remains a preliminary cost assessment. The agency's initial analysis heartened supporters of the legislation since it projects the reform package, if followed to the letter, could reduce projected deficits over time.

The health reform package would provide government subsidies to low- and middle-income families buying health insurance on their own, expand eligibility rules for Medicaid and provide coverage for a majority of uninsured Americans. It would also establish a number of insurance reforms.

The whole package will cost roughly $940 billion over 10 years to provide expanded insurance coverage, according to CBO.

But overall, the plan could reduce the deficit by $143 billion over the first 10 years. And over the following decade, the CBO projected, health reform could reduce the deficit by more than $1 trillion, although the agency stressed that such long-term projections are highly uncertain. (Deficit experts offer a fiscal reality check.)

The estimated long-term deficit reduction comes mainly from more than $500 billion in savings from health programs like Medicare, and $438 billion in new tax revenue.

While all potential savings are welcome, opponents of reform say the CBO numbers underestimate the future costs of the bill because, they say, a number of the deficit-reducing measures aren't politically realistic and therefore won't come to pass.

What's more, opponents note, Congress is likely to soon reverse a steep reduction in Medicare physician payment rates -- a move that would undercut any deficit savings from health reform.

By contrast, supporters of reform say the CBO underestimates the bill's potential savings, because the agency doesn't credit the bill's experimental measures designed to make the health care delivery system more cost-efficient.

Here's a breakdown of some of the ways health reform will be paid for.

Where the money will come from

Increase the Medicare tax on high-income households: The reconciliation bill that passed by Congress on Thursday has changes to the Medicare tax that represent the largest single revenue raiser in the health reform package.

The CBO estimates the provision would raise $210 billion over 10 years.

Currently, the Medicare payroll tax is 2.9% on all wages -- with the worker and his employer each paying 1.45%.

The reconciliation bill, like the Senate bill that passed into law earlier this week, will raise the percentage paid by high-income individuals by 0.9 percentage points, so an individual would pay 2.35% on his wages.

The reconciliation bill, however, also will subject the investment income of high-income households, such as dividends, interest and rent, to a 3.8% Medicare tax.

High-income is defined as individuals making more than $200,000 ($250,000 for couples filing jointly).

The tax will be on the lesser of one's investment income or the amount of modified adjusted gross income above the income threshold.

In other words, if a couple's total income is $300,000 ($50,000 above the threshold), and they had $40,000 in investment income, the 3.8% tax would apply to the $40,000. If their investment income was $60,000, however, they would only pay the tax on $50,000.

But it is considerably weakened from the Senate-passed bill, after objections from unions and others. Fiscal hawks have been arguing for a stronger excise tax since they believe it has the best chance of curbing the growth in health costs, which is a main goal of health reform.

The idea is that an excise tax would persuade workers and employers to choose lower-cost plans. While technically a tax on insurers, they are expected to pass along those costs to policyholders.

Once employers spend less money on health care, they will use the money saved to pay workers higher wages, or so the economic theory goes. The workers will then owe income tax on those higher wages, providing revenue to help pay for health reform.

But the reconciliation bill, compared to the Senate bill, raises the thresholds for plans that would be subject to the tax and delays its enactment by five years -- from 2013 to 2018.

The new thresholds will be $10,200 for singles, up from $8,500 in the Senate bill; and to $27,500 for families, up from $23,000 in the Senate bill. The thresholds would be higher still for retirees and employees in high-risk professions ($11,850 for individuals and $30,950 for families).

Those thresholds could go up even more by 2018 if health care inflation is higher than expected.

The CBO estimates the provision will raise $32 billion over 10 years, nearly 80% less than the $149 billion in the Senate bill.

Penalties for those who don't get coverage: Like the Senate bill, the reconciliation bill will impose a financial penalty on most Americans who don't buy health insurance.

Come 2015, individuals who choose not to buy insurance will have to pay the greater of $325 or up to 2% in income ($695 or up to 2.5% in income thereafter).

Those whose incomes are low enough that they are not required to file a tax return will be exempt from this requirement.

The CBO estimates this provision will raise $17 billion over 10 years.

Require employers to pay if they don't provide coverage: Like the Senate bill, the reconciliation bill will assess a penalty on employers with more than 50 workers if they do not provide health insurance coverage and have workers who would qualify for federal subsidies to buy insurance on their own. But the reconciliation bill ups the penalty from $750 per full-time worker to $2,000.

During an initial transition period, however, companies will only have to pay penalties on some of their employees.

The CBO estimates this provision will raise $52 billion over 10 years.

Impose new fees on the health industry: The reconciliation bill will impose new fees on health care companies such as drug makers, medical device makers and insurers. The fees will be in exchange for the new business that will come their way as a result of the expected influx of Americans who will obtain health coverage and use more medical services.

The CBO estimates this provision will raise $107 billion over 10 years.

Trim various health-related tax breaks: The reconciliation bill will impose an additional 20% penalty for non-health withdrawals from tax-advantaged health savings accounts, up from 10% in the Senate bill.

It will limit to $2,500 the amount workers may contribute to flexible health spending accounts at work, down from $5,000 currently. It will also increase how much the non-elderly and the non-disabled would have to rack up in medical bills before being allowed to deduct expenses above that amount on their federal income tax return.

Plus, it will make it harder to deduct medical expenses by raising the percentage of adjusted gross income that would have to be matched in health bills before being allowed to deduct any further medical expenses. The floor will be raised to 10% from 7.5% for those under 65.

These provisions combined will bring in an estimated $29 billion over 10 years.

Create a new long-term care insurance program: The bill will create the Community Living Assistance Services and Supports Act to help seniors in need of help with daily tasks such as bathing and dressing. Those who enroll in the program will have to pay premiums into the program for five years before being eligible for benefits.

In the first 10 years, the program it is expected to take in more money than it pays out, which is why the CBO says it would reduce the deficit by $70 billion. But in the second decade and beyond, the program is projected to pay out more than it takes in, and will therefore contribute to the deficit.

That's why some say that the CLASS Act is a budget gimmick that will not contribute to the potential of health reform to reduce the deficit.